Making Cents: Bequeathing the vacation property
Hopefully, you are one of the 7.9 million Americans who own vacation property. Some have passed through more than a generation, but many more owners hope their family playground will be available for future generations. To pull that off and avoid painful heartache, significant planning is involved.
Assuming that you'd like to see the home remain in the family, a good place to start is an open discussion with the next generation about their desires to own and care for the property. Many families will encounter problems right at step one because some children have the means and desire to own the home while others do not. This means that your first decision has two broad possibilities: Sell the home or maintain it for future family use.
In a sale, you may consider a sale only to those children who can afford to maintain the home or to a third party -- and then let the cash flow through your estate or be gifted prior to your death. Beware that a sale to selected family members may cause family problems down the road.
If you and the family would like to maintain the home for future generations regardless of their ability to maintain the home, then a plan is mandatory.
For starters, consider placing the home into an entity such as a family limited partnership or a limited liability company. This structure may protect the property against legal, marital or financial issues of any of the beneficial owners. It may provide some form of valuation discount for estate tax planning. And perhaps most importantly, the partnership or LLC agreement can include rules regarding usage, funding and legacy planning for future generations. The agreement can stipulate when beneficiaries get to use the property. This is the most powerful way for you to give it your best shot at legacy planning with respect to a beloved piece of real estate.
It is also prudent to set aside a fairly large sum of cash along with the home. The thinking here is to fund in advance the cash needed to maintain the property. Take a close look at the maintenance costs such as taxes, water, utilities and the larger capital issues as well, like driveways, windows and heating systems, which can cause a huge problem for beneficiaries.
Talk to a financial professional immediately if this issue is something facing your family. We've all read about problems with families who ignore such issues -- only now you know that these problems can be avoided.
John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at email@example.com.